The IRS has told investors that moving an appreciated stock portfolio into a brand-new exchange-traded fund can be a taxable sale, not a tax-free swap, when the move is part of a prearranged plan. Revenue Ruling 2026-20, posted on Sept. 28, treats an investor who hands securities to a new ETF and later sees them redeemed out to an authorized participant as having made a taxable exchange. A companion document, Notice 2026-62, asks for public comments by Oct. 28 and says the government is weighing broader guidance.
The question for an investor is narrow and concrete: did the plan include a pre-set exit for the stock, or is the ETF just a place to hold it? In the arrangement the ruling describes, the ETF is a pass-through for the securities, and the investor is taxed as if the portfolio was sold to the authorized participant. Someone who simply buys ETF shares with cash, or who holds a fund that creates and redeems shares in the ordinary course, is not what the ruling addresses.
A realized gain from a portfolio swap lands on the same return that sets a retiree’s provisional income and Medicare IRMAA tier. The Retirement Tax & Withdrawal Planner does not rule on ETF exchanges; it shows what a larger taxable year does to the rest of the bill, with four calculators (provisional income, IRMAA tier, RMD schedule, Roth bracket fill) and the senior deduction.
The plan the ruling describes
The facts in Revenue Ruling 2026-20 are specific. “As part of a plan, an investor transfers a portfolio of securities to a newly formed exchange traded fund,” the ruling says. The ETF intends to qualify as a regulated investment company. It issues shares to an authorized participant, a market maker that creates and redeems ETF shares, and then redeems those shares under section 852(b)(6) in exchange for the securities the investor put in.
Section 351 of the tax code says no gain or loss is recognized when property goes to a corporation in exchange for its stock, if the people transferring it control the company afterward. The ruling answers that the substance of the plan matters more than its steps. The investor “is treated as undertaking a taxable exchange under section 1001 with AP” of the transferred securities, and the ETF “was merely a conduit” through which the securities moved from the investor to the authorized participant.
The ruling adds that the result would be the same with multiple investors. It analyzes one prearranged plan and does not say every Section 351 exchange is taxable. It amplifies Revenue Ruling 71-336 and distinguishes Revenue Rulings 75-447 and 88-32. The Office of Associate Chief Counsel (Corporate) is the listed principal author.
What Notice 2026-62 asks for
The notice is wider than the ruling. Notice 2026-62 says the Treasury Department and the IRS have identified “novel investment fund strategies that purport to produce tax results” that may conflict with the purpose of the tax rules. It names several: certain ETF redemptions under section 852(b)(6), what it calls Section 351 conversion transactions, partnership exchange funds, box spread funds and tax-aware funds that use identified straddles and swap terminations.
In a Section 351 conversion, the notice says, investors contribute appreciated securities to a newly formed ETF, and the ETF later redeems a creation unit in securities that are materially different from what was contributed. The notice says ordinary ETF creation and redemption activity is not what it addresses, and it excludes several other arrangements.
Possible retroactive reach
The IRS and Treasury say they are considering additional guidance that “may include regulations, notices, revenue rulings.” The notice states plainly that “any such guidance could apply prospectively only or retroactively to transactions that already have taken place,” and cites the Treasury’s authority to let a regulation take effect retroactively “to prevent abuse.” The IRS also reserves the right to challenge these strategies on examination.
For an investor who has already moved a portfolio into a new ETF, that language is the reason to read the notice closely. No final rule exists yet, and what it would say about past transactions is not known.
How to file a comment by Oct. 28
Written comments are due Oct. 28, 2026, 19 days from today. The notice says later comments may be considered but might not be used if that would delay forthcoming guidance. Comments can be submitted online at Regulations.gov under docket IRS-2026-1255, or by mail to the Internal Revenue Service, CC:PA:01:PR (Notice 2026-62), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. The notice lists no email address. Every comment will be published on the public docket. The IRS contact named in the notice is Justin R. Karlin of the Office of Associate Chief Counsel (Financial Institutions & Products), at (202) 317-6842.
Before moving a taxable portfolio into any fund
The full text is on the IRS site: the agency’s guidance listing shows both documents posted on Sept. 28, 2026, and the PDFs above carry the language word for word. An investor who is weighing a conversion, or who already completed one, should have the sponsor’s offering documents and a tax adviser’s read of the plan in hand before acting.
Two facts decide most of the analysis: whether the transfer was part of a pre-set plan that includes a redemption of the investor’s securities, and how large the unrealized gain in the portfolio is. A taxable exchange realizes that whole gain in one tax year, which can raise taxable income, the share of Social Security that is taxed and the Medicare surcharge known as IRMAA, the income-related monthly adjustment amount.
The ruling itself sets the posture: this is the IRS’s position on one described plan, and the notice is a request for input on what comes next. The ruling is published guidance as of Sept. 28, no final rule from the notice exists yet, and the comment window closes Oct. 28.
A realized portfolio gain reaches past one tax line
A gain realized in a taxable swap raises taxable income for the year, and for a retiree it can also change provisional income and the IRMAA tier. The Retirement Tax & Withdrawal Planner puts four calculators (provisional income, IRMAA tier, RMD schedule, Roth bracket fill) and the account withdrawal order in one place, so the cost of a bigger year shows up before the return is filed. It also covers the senior deduction.
Size up a large gain with the Retirement Tax & Withdrawal Planner before filing →
This article was produced with AI assistance and reviewed by The Financial Wire’s editorial team.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
